The High Cost of Good Intentions

A History of U.S. Federal Entitlement Programs

John F. Cogan

• Publisher: Stanford University Press
• Year: 2017
• Print ISBN: 9781503610071, 9781503603547
• eBook ISBN: 9781503604254
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Social Policy
• Index: Politics & International Relations

Federal entitlement programs are strewn throughout the pages of U.S. history, springing from the noble purpose of assisting people who are destitute through no fault of their own. Yet as federal entitlement programs have grown, so too have their inefficiency and their cost. Neither tax revenues nor revenues generated by the national economy have been able to keep pace with their rising growth, bringing the national debt to a record peacetime level.

The High Cost of Good Intentions is the first comprehensive history of these federal entitlement programs. Combining economics, history, political science, and law, John F. Cogan reveals how the creation of entitlements brings forth a steady march of liberalizing forces that cause entitlement programs to expand. This process—as visible in the eighteenth and nineteenth centuries as in the present day—is repeated until benefits are extended to nearly all who could be considered eligible, and in turn establishes a new base for future expansions. His work provides a unifying explanation for the evolutionary path that nearly all federal entitlement programs have followed over the past two hundred years, tracing both their shared past and the financial risks they pose for future generations.

1

Introduction

Many of these programs may have come from a good heart, but not all have come from a clear head—and the costs have been staggering. We can be compassionate about human needs without being complacent about budget extravagance.

Ronald Reagan, 1981¹

THROUGHOUT U.S. HISTORY, FEDERAL ENTITLEMENT programs have sprung from the noble intention of providing assistance to people who are destitute through no fault of their own. Veterans’ entitlements, dating back to the Revolutionary War, were created to provide assistance to soldiers disabled by injuries and illness suffered during wartime service. The New Deal and Great Society social insurance and welfare entitlements were created with the lofty goal of providing a safety net of assistance to the elderly, single mothers, the disabled, the unemployed, and people suffering from ill health. These programs kept disabled veterans of nineteenth-century wars out of almshouses, enabled millions of senior citizens to live out their retirement years without poverty, and provided needed assistance to countless Americans who faced economic destitution.

But over time, entitlements have become a complex system that now transfers hundreds of billions of dollars each month from one group in society to another, most often regardless of individual need. The scale of federal entitlement assistance today is unmatched in human history. Fifty-five percent of all U.S. households receive cash or in-kind assistance from at least one major federal entitlement program. Among all households headed by a person under age 65, over 40 percent receive entitlement program benefits. Eighty percent of all people living in households headed by single mothers receive entitlement benefits, and nearly six out of every ten children in the United States (58 percent) are growing up in a family on the entitlement rolls.

The labyrinth of overlapping entitlement programs, each with its own eligibility rules, allows 120 million people, two-thirds of all entitlement recipients, to simultaneously collect benefits from at least two programs. Forty-six million people, nearly one-third of all recipients, collect benefits from three or more federal entitlement programs simultaneously.

As well-meaning and beneficial as many entitlements may be, they have come at a high cost. They have undermined the natural human desire for self-sufficiency and self-improvement. Social Security and Medicare have reduced the perceived need by young workers to save for their retirement and have induced senior citizens to forgo years of productive and rewarding employment. The welfare system’s high marginal tax rates have discouraged work and penalized investments in human capital. The system has created incentives for young women to bear children out of wedlock and remain unmarried. It has discouraged fathers of young children from meeting their parental responsibilities.

This high human cost has been matched by large fiscal costs and monumental inefficiency. The $2.4 trillion the federal government currently spends annually on entitlements equals $7,500 for every man, woman, and child living in the United States, an amount that is five times the money necessary to lift every poor person out of poverty. Only about half of all entitlement assistance (48 percent) goes to the poor. The other half, amounting to over $1 trillion annually, is spread widely across households located over all parts of the U.S. income distribution. While the massive expenditure has significantly reduced poverty among senior citizens, poverty rates for all other adults and for children are no lower today than they were a half century ago.

Since World War II, total federal spending as a share of the nation’s output of goods and services has increased from 15 to 21 percent. The growth in entitlement spending accounts for all of this increase. Federal spending as a percent of U.S. gross domestic product on all other federal activities combined, including national defense, foreign affairs, and the broad array of nonentitlement domestic programs, has declined. Neither revenues generated by the growing national economy nor those extracted from individuals through taxation have kept pace with rising entitlement spending. As a consequence, the national debt now stands at a record peacetime high.

Entitlements have created a fiscal challenge unlike any other in the nation’s history. The baby boom generation’s retirement, coming on the heels of eight decades of entitlement liberalizations, has put the nation’s budget on a dangerous financial trajectory. Previous periods of high federal expenditures and increasing debt have been due mainly to wars and have been temporary. Today, the nation faces a prolonged period of permanently high federal expenditures that will impose a crippling debt burden on future generations if they are left unchecked.

How did America arrive at this point? How were noble and well-intentioned ideals distorted into unaffordable programs that now threaten U.S. economic prosperity and harm many of those individuals whom entitlement programs seek to help? How did we end up transferring billions of dollars to well-off and moderately well-off senior citizens, most of whom are able to provide for their own retirement needs and, at the same time, leave 16 million children in poverty? How long can we rationalize providing more than $50,000 a year in Social Security and Medicare benefits to retired middle-income couples when nearly half of all U.S. households headed by people under age 65 are living on less than that? And how, in the name of helping destitute younger members of society, can we justify erecting barriers to their efforts to climb up from poverty? How did the simple idea of assisting people in need evolve into compulsory laws that require citizens to sacrifice their individual liberties?

This book examines how and why entitlement programs have grown so large and have become so far removed from the ideals on which they were founded. It presents a history of major federal entitlement programs from the beginning of the Republic to today, showing how they evolved and explaining the forces that caused their evolution.

The book’s central theme is that the creation of entitlements brings forth relentless forces that cause them to inexorably expand. These liberalizing forces are inevitable and inseparable from the entitlements themselves. They originate from a well-meaning human impulse to treat all similarly situated people equally under the law. When first enacted, entitlement laws, for policy or fiscal reasons, confine benefits to a group of individuals who are deemed to be particularly worthy of assistance. As time passes, groups of excluded individuals come forth claiming that they are no less deserving of aid. Pressure is brought by, or on behalf of, excluded groups to relax eligibility rules. The ever-present pressure is magnified during periods of budget surpluses and by public officials’ imperative to be elected and reelected. Eventually the government acquiesces and additional claimants deemed worthy are allowed to join the benefit rolls. That very broadening of eligibility rules inevitably brings another group of claimants closer to the eligibility boundary line, and the pressure to relax qualifying rules begins again. The process of liberalization repeats itself until benefits are extended to a point where the program’s purposes bear only a faint resemblance to its original noble intentions.²

As this book will show, these forces are evident in the early histories of nineteenth-century entitlements, and they continue to drive entitlement policy today. They cause entitlements to follow a common evolutionary path of nearly continual liberalization that is interrupted only rarely by legislative retrenchments. Each step along the path establishes a new base on which future expansions are built.

The nation’s first major federal entitlements were benefit programs for disabled wartime veterans. Enacted at the outset of each major war, these programs were originally established to compensate soldiers who were disabled in wartime service and widows of soldiers killed in action. Revolutionary War pensions were initially confined to members of the Continental Army and Navy. Congress then extended pensions to members of state militias, then to disabled wartime veterans regardless of whether their disability was related to wartime service, and finally, in 1832, to virtually all remaining Revolutionary War veterans. These laws effectively transformed the original disability program for Continental Army soldiers and seamen into a general retirement program for all remaining War of Independence veterans.

Civil War and World War I pensions repeated this pattern, but on a far grander scale. What began as an entitlement to Union veterans disabled during the Civil War grew to cover all Union veterans who reached old age, transforming the initial disability program into the nation’s first large-scale federal retirement program. An extreme instance of just how broadly Congress is willing to extend the class of worthy entitlement recipients occurred nearly one hundred years after the Civil War began when in 1956, Congress extended pensions to a few remaining widows of Confederate soldiers. During World War I, Congress took steps to prevent a repeat of the Civil War pension experience. However, despite these precautionary measures, Congress quickly extended pensions to all disabled veterans regardless of whether their disability was war related.

All of the major Revolutionary War pension expansions were enacted during years of large budget surpluses. The 1890 Dependent Pension Act for Civil War veterans, at the time the single costliest entitlement expansion in U.S. history, was enacted following twenty-four consecutive years of annual budget surpluses. The magnitude of these surpluses was, according to historian Davis Dewey, “without parallel in the history of any nation.”³ World War I veterans’ pension liberalizations came amid a decade of large annual budget surpluses. The last of these occurred in 1930, just before the Great Depression plunged the federal budget into deep deficit.

The navy pension fund, the federal government’s first trust fund, foreshadows the road the nation is traveling down with Social Security. The navy fund was financed by prize money, or “booty,” from the sale of the captured contents of enemy and pirate ships. Temporary trust fund surpluses during the 1830s gave rise to sweeping expansions of navy pensions. The last of these awarded retroactive lump-sum benefits in excess of $100,000 (in today’s dollars) to 9 percent of the program’s new beneficiaries. The largesse quickly bankrupted the trust fund, and Congress turned to general revenues to finance future navy pensions, all the while maintaining the fiction of trust fund financing.

In dispensing Civil War pensions, Congress discovered the power of entitlements as an efficient vehicle for gaining electoral advantage. During the late 1800s and early 1900s, the Republican Party used Civil War pensions as a tool to help realign the American electorate and secure unified control over Congress and the presidency for fourteen consecutive years. Their efforts were aided by the Grand Army of the Republic (GAR), the country’s first large national lobbying organization, which rose to prominence only after Civil War pensions were firmly established. The GAR joined with the Pension Bureau and the congressional Veterans Committees to form the nineteenth century’s most powerful iron triangle to protect and extend veterans’ pensions.

The fiscal consequences of these liberalizations were, for the most part, limited. The ultimate size of the group that Congress could consider to be worthy of pensions was restricted to wartime veterans and their survivors. Consequently, for most of the nineteenth century, entitlement expenditures remained a light burden on the nation’s income. Even these burdens were temporary as time exacted its inevitable toll on wartime veteran populations.

The New Deal broke new ground by extending entitlements to people in the general population who had performed no particular service to the federal government. The nation’s experience with nineteenth-century veterans’ entitlements should have served as a warning about the fiscal and societal consequences of extending entitlements. Policymakers should have foreseen that the same forces that had caused them to continually liberalize veterans’ entitlements would have an even stronger effect on broader entitlement programs. By 1935, the tendency to continually expand entitlements, born of a desire to help the destitute and reinforced by more than a century of legislative precedent, had already been firmly embedded in Congress’s collective DNA. Policymakers should have also recognized that broader entitlements made the potential class of people deemed worthy of government aid open-ended. Since one cohort of retirees or low-income people immediately replaces its predecessor, entitlements for the general population would continue ad infinitum. There is no starting over, as in the cases of the veterans’ pensions. Moreover, each legislative expansion would establish a new permanent base on which future liberalizations would be added.

The nineteenth-century entitlement lessons went unheeded, and the entitlements arising out of the New Deal marched along the same liberalizing path as the earlier veterans’ programs, but with far more vigor and far larger consequences. The flagship Social Security program initially covered only 50 percent of the workforce and was designed to provide a safety net of assistance to retired workers. But the “large reserve” of surplus payroll tax revenues created by the Roosevelt administration in order to finance future benefits tempted Congress in 1939 into extending benefits to wives and surviving children of qualifying workers and raising benefits significantly.

The pattern of expanding Social Security when program surpluses emerged was repeated over and over again following World War II. Every Congress, save one, and every president during the years from 1950 to 1972 took action to expand the program. By the mid-1950s, Congress had made coverage nearly universal. Disability benefits for older workers with permanent disabilities were established in 1956. Within a decade, Congress extended the class of worthy disability recipients to temporarily disabled and younger workers. Medicare benefits were added, first for senior citizens and then for disabled workers. Numerous increases in retirement benefits tripled the inflation-adjusted value of the typical new retiree’s monthly Social Security check. By the mid-1970s, these expansions had transformed the original safety net program into one that padded the already comfortable lifestyles of millions of middle-class retirees. But the high cost of these liberalizations brought the program to the brink of bankruptcy in 1980, just as liberalizations had done with the navy pension fund 140 years earlier.

In the process of enacting these expansions, Congress, led this time by Democrats, raised the practice of using entitlements for electoral gain to a finely honed skill. From the end of World War II through 1975, seven of the ten legislative increases in Social Security monthly benefits took effect during an election year; four of these increases first appeared in retirees’ October Social Security checks—one month before national elections. The election-year bidding war in 1972 between Democratic party presidential contenders and President Richard Nixon produced an across-the-board, permanent, 20 percent increase in monthly benefit levels for the 28 million recipients.

The New Deal public assistance programs initially provided financial assistance to supplement state government support only of people who were unable to provide for themselves: the poor elderly, blind people, and poor children in need of assistance due to the father’s death or desertion. Under this policy, states retained primary authority to determine which individuals in each of these groups were worthy of welfare assistance.

Following World War II, the federal government progressively expanded its authority over welfare entitlements. Executive branch officials began by using federal financial assistance as leverage to force states into expanding the universe of worthy claims. From 1965 to 1975, the desire by federal authorities to ensure that all worthy welfare claimants receive assistance produced a bipartisan executive, legislative, and judicial blitzkrieg of liberalizations that is unmatched in all of U.S. history. The barrage included establishing new entitlements for Medicaid, food stamps, Supplemental Security Income, child nutrition programs, social service benefits, and earned income tax credits. It included Supreme Court decisions that embraced novel interpretations of the law and the U.S. Constitution to declare that long-standing state and local government public assistance rules and regulations were violations of welfare claimants’ statutory and constitutional rights. And it included congressional acts that wrote into the federal statute books new public assistance requirements on state governments.

By the late 1960s, the federal government had established primary control over welfare entitlements. Federal authorities now played a central role in determining who were worthy claimants. State governments were reduced to acting mainly as administrative agents for these federal programs. The New Deal policy of allowing states to determine welfare eligibility had become a dead letter.

By the mid-1970s, the network of federal entitlement programs that constitutes today’s welfare state was fully in place. All of today’s major federal entitlement programs, except for the Affordable Care Act’s health insurance entitlements, had been written into the statute books. Entitlement spending accounted for over half of all federal program expenditures.

Ronald Reagan’s election in 1980 brought an attempt to slow the juggernaut. The attempt, however, achieved only modest success in restraining the growth in entitlement spending and in putting Social Security temporarily on a sound financial footing.

By the 1990s, there was widespread recognition in Washington that decades of liberalizing entitlements and demographic trends had put the federal government’s finances on an unsustainable path. A storm was brewing on the fiscal horizon. Yet all three branches of government acted as if they were in a collective state of denial. Despite knowledge that without legislative action, Social Security was destined to become insolvent, no Social Security reforms were enacted or implemented. Congress and the executive branch, despite the same knowledge about Medicare’s poor financial future, were not only unable to restrain the existing program’s expenditures, they extended Medicare coverage to include prescription drugs.

Knowing full well the dimensions of the coming fiscal storm, Congresses and various presidents of the past twenty-five years continued a steady stream of legislation extending the class of worthy welfare claimants higher up the income ladder. The Congress and the executive branch capped off this remarkable period by mandating universal health insurance coverage and subsidizing its purchase for households with incomes far in excess of the national median. The Supreme Court add...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• Dedication
• Acknowledgments
• Contents
• 1. Introduction
• 2. Creating Legislative Precedents: Revolutionary War Pensions
• 3. An Experiment with Government Trust Funds: Navy Pensions
• 4. The First Great Entitlement: Civil War Pensions
• 5. Repeating Past Mistakes: World War I Veterans’ Benefits
• 6. Retrenchment: Roosevelt and the Veterans
• 7. The Birth of the Modern Entitlement State
• 8. The Consequences of Social Security Surpluses
• 9. A New Kind of Entitlement: The GI Bill
• 10. Setting the Postwar Entitlement Agenda, 1946–1950
• 11. Establishing Social Insurance Dominance, 1951–1964
• 12. The Beginning of the Great Turn in Welfare Policy, 1951–1964
• 13. The First Great Society
• 14. A Legal Right to Welfare
• 15. The Second Great Society
• 16. First Inklings of Fiscal Limits, 1975–1980
• 17. A Temporary Slowdown, 1981–1989
• 18. Recognition and Denial, 1989–2014
• 19. A Challenge Unlike Any Other in U.S. History
• Notes on Major Data Sources
• Notes
• Bibliography
• Index